Understanding Fiscal Deficit as Percentage of GDP

Fiscal deficit measures the gap between government spending and revenue and is commonly expressed as a percentage of Gross Domestic Product (GDP).
In this problem, the fiscal deficit increases from 4% of GDP in 2015 to 5% in 2016, while GDP itself grows by 10%.

The key point is that the question asks for the percentage increase in the actual fiscal deficit amount, not merely the change in percentage points.
Many students confuse these two concepts.

To simplify calculations, we assume GDP in 2015 to be 100 units. This assumption does not affect the final percentage.

Step-by-Step Solution

Step 1: Assume GDP in 2015

Let GDP in 2015 = 100 units

Step 2: Fiscal Deficit in 2015

4% of 100 = 4 units

Step 3: GDP in 2016

GDP grows by 10% → 100 × 1.10 = 110 units

Step 4: Fiscal Deficit in 2016

5% of 110 = 5.5 units

Step 5: Absolute Increase in Fiscal Deficit

5.5 − 4 = 1.5 units

Step 6: Percentage Increase

(1.5 ÷ 4) × 100 = 37.5%

Correct Answer

(A) 37.50%

The fiscal deficit increases from 4 units to 5.5 units, which is a 37.5% rise compared to the original amount.

Why Other Options Are Incorrect

(B) 35.70%

This value may result from using an incorrect GDP figure (such as 108 instead of 110) or rounding errors.
The correct calculation gives an exact result of 37.5%.

(C) 25.00%

This mistake occurs when students calculate only the percentage-point increase:
(5% − 4%) ÷ 4% × 100 = 25%.
It ignores GDP growth entirely.

(D) 10.00%

This assumes the fiscal deficit increases at the same rate as GDP, which is incorrect because the deficit percentage itself also increased.

Options Analysis Table

General Formula for Similar Problems

If fiscal deficit changes from r₁% to r₂% and GDP grows by g (in decimal form),
then:

Percentage Increase = [(r₂(1 + g) − r₁) ÷ r₁] × 100

Substituting values:
(0.05 × 1.1 − 0.04) ÷ 0.04 × 100 = 37.5%